Category Archives: China

My edge today will focus in the issue of China and its relevance in the Economic world stage. It is known in the current influential circles the imbalances to the Global economy of the chinese currency peg to the US Dollar, or its massive size of Foreign Exchange reserves or the way that the uncertainty about its role in the Global aggregate demand distorts expectations and the stability of Financial Markets.

But less is said about the details of its Economy. We maybe could get a good glimpse by an analysis of its renminbi (RMB) Exchange rate Policy like this piece of FT’s Gavyn Davies blog post. In it we see how the current Global Financial Markets, specially the funding for the massive credit markets search for profits that in part is supported by Chinese capital investment obsession of the last two decades :

”China’s exchange rate policy has, of course, always been a controversial matter. After a decade of deliberate undervaluation, intended to promote export led growth, China finally succumbed to international pressure in 2005, and allowed the real value of the renminbi (RMB) to start rising. Since then, it has risen by about 30 per cent, with only one interruption in the aftermath of the great financial crash.

The new prices data suggest that the renminbi is now approximately fairly valued. Arvind Subramanian and Martin Kessler have already crunched the numbers, and have concluded that the average level of prices in China is almost exactly where it should be compared to the US, allowing for the economy’s relative level of development. Other methods produce slightly different results, but the conclusion that the currency is no longer substantially undervalued seems robust.

In this respect, China has been a good global citizen in recent years, no doubt in part because a rising exchange rate helped with its domestic objectives by boosting consumption. The rising RMB has helped to reduce the huge trade imbalance between the US and China, and taken some of the pressure off other emerging economies whose competitiveness was under threat.

The inexorable rise in the RMB has also led to burgeoning “carry trades”, involving a surge in short-term capital flows into the onshore market in mainland China. This has been a two-edged sword. It has provided a source of funding for the financial system, at a time when more credit was needed to disguise the stresses in the highly indebted local government and corporate sectors. But it also extended the internal credit bubble even further into unsustainable territory, and forced China to intervene even more heavily in the foreign exchange markets to keep the currency down. ”

But as Martin Wolf and David Piling point out in another FT’s article, the game will most probably change, not least in part due to internal pressures by the chinese economy to adapt to new realities but also because there’s a real need to address the international pressures to Growth in the economies of the Western Countries. In the real world economy, nothing is really created new, everything is transformed to bring about balance and change…. If there are imbalances that probably means that something will need to change to restore Balance.

This is further underscored by the debate about the rise of China as the World’s largest economy on a GDP measure only ( adjusted for Purchasing Power Parity the chinese economy is still a relatively poor Country): ”Nevertheless, China is still a poor country: the purchasing power of its GDP per head was 99th in the world. Since China also invests close to half its output, relative consumption per head was lower still.” says Wolf in the article. And on such measures as Technological intensity of its economy, productivity of services sectors, quality of its Political and Academic institutions, China like most emerging countries still lags behind the advanced economies by a significant amount. Correctly pointed here by David Piling:

”China is a middle-income country at best, with per capita income somewhat below that of Peru. Its technological capabilities are far behind the US and other western economies, including historic adversary Japan. Militarily it has nothing like the global clout of the US. Its powers of persuasion are also lacking. China does not have a sufficiently attractive political system to influence global opinion. Its closest allies are the likes of North Korea and Pakistan. Mao Yushi, the 85-year-old economist who is considered one of the intellectual authors of China’s economic modernisation, takes a studiously realistic view of the new numbers. He accepts that China is the world’s biggest economy but considers this to be nothing more than a reflection of the fact that it is home to 1.36bn people, more than any other nation.

With all this good judgment, there’s no way to escape an important reality. The rise of China to the World economic stage changed the Global Economy signficantly and promises to continue to do so. To say the least, any informed and responsible Economist or analyst must not ignore the news about developments in the Chinese economy for many years to come, whether in the short-term or in the medium to long-term.

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This interesting Bloomberg article that I received as an alert, rightly reminded and alerted me to the possible potential conflicting situation regarding Southeast Asia Seas, with its increasing importance on the Global International Trade Landscape. The American Vice-President Joe Biden does not share the concern of many, and in the recent visit to Singapore he made his demarches on this issue to Japanese and Singaporean counterparts. We feature here his Bloomberg interview on the subject as well:

Important point is emphasized by Biden on the fact that the USA is a Pacific Power, America isn’t going anywhere and for the most part the success of the region rests on the stewardship of America’s military presence there.

Even if we could make this last point a bit contentious, it is without doubt that the increasing importance of Asia and Southeast Asia in the International Trade arena in general certainly stems in large part from the commitment of the United States to the region, and not just on Diplomatic, political or military fronts, as we could well easily notice the strong economic and corporate presence and interests of American companies of various sorts.

What is most relevant, I suppose in the article is the push of Biden to China to fend off and sign a ‘Code of Conduct‘ for operation on the region’s Seas, which indicates that there’s still the potential for diplomatic and political frictions on the issue. Despite the obvious interest of all parties that there will be a smooth and peaceful resolution of any friction. China, as a major player, and one that will certainly continue to grow in weight and importance, has also major responsibilities in avoiding any conflict or unpleasant difficulties for the free trade that benefits all in the end.

And given the huge yet to be discovered potential of the Southeast Sea….:

China, the world’s second-biggest economy, rejects U.S. involvement in South China Sea matters. While it has said it wants a code of conduct in the waters, it also seeks to resolve territorial disputes on a bilateral basis. It views the other countries as aggressors, accusing them of breaching a previous agreement on operating in the area.’

….it isn’t hard to see what is at stake.

With stakes that high, agreement is a common sense result.

Last but not least, there’s a reference to North Korea’s nuclear ambitions, that seemed to have escalated the tensions in the region, and the US concern and bid to contain it. As far as China’s views are of concern this is abusive on the part of the US. But Japan, on its part just wants to be able to regain some military weight, after the heavy restrictions of the World War II defeat, which I see as understandable in a world unpredictable and with danger where we don’t expect! Shivering….Biden tell us that everything will just be economic and diplomatic…..peaceful diplomacy. The world hopes he is right and successful….